Life Cycle Costing

Life Cycle Costing-definition

Assessment of the costs of a good or

service over its entire life cycle.
Product Life Cycle
 Life Cycle Costing

Marketing & Customer

R&D Design Manufacturing
Distribution Service

Upstream Costs Downstream Costs

(before Manufacturing) ( After Manufacturing)

Life Cycle Costing

Industries with High Upstream Costing

Computer Software
Specialized Industrial Equipments
Specialized Medical Equipments
Industries with High downstream Costing

Pharmaceuticals
Perfumes
Cosmetics
toiletries
Improving Up stream & Down stream Costs

Improving relationship with suppliers

Improving Design

Improving Manufacturing Process

Value Chain Analysis

Process Re-engineering
 Value Chain showing Up stream & Down stream linkages

Design

Not Easy Poor Design

To Manufacture

Marketing &
Manufacturing
Distribution
Poor Quality Rush Small Orders

Poor Improper Training

Quality Installation
Service &
Warranty
 The Importance
Importance Of Design Of Design

Reduced Time to Market

Reduced Expected Service Cost

Improved Ease of Manufacture

Process Planning & Design

 The Importance
Importance Of Design Of Design

Reduced Time to Market

In a competitive world speed of development &speed of

Delivery are critical.
Priority must be to reduce time of the product to market
 The Importance
Importance Of Design Of Design

Reduced Expected Service Cost

Through Careful, simple design and use of modular,

Interchangeable components, the expected service
Costs can be greatly reduced
 The Importance
Importance Of Design Of Design

Improved Ease of Manufacture

To reduce production costs and speed the

Production
The design must be easy to manufacture
 The Importance
Importance Of Design Of Design

Process Planning & Design

The plan for the manufacturing process should be

Flexible,
Allows fast setups and product Change over,
using agile manufacturing concepts,
Computers integrated manufacturing,
Computer Assisted design and
Concurrent Engineering .
 Four Design Methods

1 Basic Engineering

2 Prototyping

3 Tem plating

4 Concurrent Engineering
 Four Design Methods

1 Basic Engineering

Basic engineering is the method in which

product designers work independently
from marketing and manufacturing to
develop a design from specific plans
and specifications
 Four Design Methods

2 Prototyping

Protyping is a method in which functional

Models of the product are developed and
Tested by engineers and trial customers
 Four Design Methods

3 Templating

Templating is a method in which an

Existing Product is scaled up or down
to fit the specifications of the desired
new product
 Four Design Methods

4 Concurrent Engineering

Concurrent Engineering is an important

method that integrates product design
with manufacturing and marketing
throughout the product life cycle
 Characteristics of the 4 design methods

Design Method Design Speed Design Cost DownStream Costs

Basic Engineering Fast Desired Complexity, Low High –non integration of Mkg-Prod

Protyping Slow Significant Cost Can reflect significant reduction

Templating Fast Modest Unknown-can be costly

Concurrent
Engineering Continuous Significant-design Can result in cost Reduction
ongoing process
 Application of LCC in a Software Firm

Firm's Name: Software Solutions

SS has two products—SS-1 for large banks & SS-2 for small banks and
Savings & Loans. Each Product is updated regularly

Using Normal Analysis GP margin Ratio

72% 60%
SS-1 SS-2 Total

Sales 45,00,000 25,00,000 70,00.000

Cost Of Sales 12,40,000 10,05,000 22,45,000
Gross Margin 32,60,000 14,95,000 47,55,000

Research & Devl 21,50,000

Selling & Service 18,50,000
Income before tax 7,55,000
 Application of LCC in a Software Firm

Firm's Name: Software Solutions

SS has two products—SS-1 for large banks & SS-2 for small banks and
Savings & Loans. Each Product is updated regularly

Life Cycle Costing for Software Solutions SS-2 is more profitable

SS-1 SS-2 Total

Sales 45,00,000 25,00,000 70,00.000

Cost Of Sales 12,40,000 10,05,000 22,45,000
Gross Margin 32,60,000 14,95,000 47,55,000

Research & Devl 15,50,000 6,00,000 21,50,000

Selling & Service 14,50,000 4,00,000 18,50,000

Income before tax 2,60,000 4,95,000 7,55,000
 Application of LCC in a Software Firm

Firm's Name: Software Solutions

SS has two products—SS-1 for large banks & SS-2 for small banks and
Savings & Loans. Each Product is updated regularly

Life Cycle Costing for Software Solutions SS-2 is more profitable

1 Total income of SS-1 is 2,60,000 of SS-2 is 4,95,000

3 Ratio of R&D, Selling & Service Cost to sales in case of

SS-1 is 67% (30,00,000/45,00,000) in case of SS-2 it is

40% (10,00,000/25,00,000)

Management can use this breakdown of costs throughout

the product’s life cycle
 Pricing Using the Cost Life Cycle

Cost Leadership Differentiation

Operating Efficiency to Reduce Cost

Penetration Pricing
Skimming
Value Pricing
Pattern in the Market
Seasonal, Cyclical, Economic factors
 Critical Success Factors, Strategic Pricing and
Research and Development at the 4 Stages of the Sales
Life Cycle for a Manufacturer of Computer Processor

Computer Sales LC Critical Success Factors Strategic Pricing Research & Development
Processor

Z300 introduction Differentiation, Innovation High Expenditure is High

performance

Y300 Growth Development of Distribution High Expenditure is High

Channel & Marketing

X 300 Maturity Cost Control, Quality Service Target Costing Value Engineering
New Features

W300 Decline Control Of cost, Capacity

Reduction, Spin off Low Price is set None
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